Spree at shops piles up record debts

Consumers ran up a record £10 billion in debt last month, shattering figures for new mortgages, credit cards, personal loans and overdrafts, the Bank of England reported yesterday.

The surprise statistics show that the consumer boom is back after a lull during the Iraq war. There are growing fears that the situation is unsustainable and based on cheap money rather than genuine wealth creation, such as rising profits and salaries.

Opposition MPs said that if interest rates or unemployment were to rise, the debt mountain could leave thousands of people unable to meet their commitments, tarnishing Gordon Brown and the Government.

Vince Cable, the Liberal Democrat Treasury spokesman, said: "An almighty crash is on the cards. Debt is soaring far above income. People are going to have to pay this back at some stage. Aggressive lenders need to be reined in and the public needs to be aware of the dangers of running on empty."

The Bank said that total lending to individuals rose to £878 billion last month, its highest level. That was a rate of increase of £1 billion on May and up 14 per cent on the previous year. Consumer credit, mostly credit cards and unsecured loans, grew by £2.2 billion and mortgage lending soared by £7.8 billion, the highest monthly figure since records began in 1993.

Fears that the housing market has ground to a halt appear to be exaggerated. Total mortgage approvals for new homes rose by 108,000, compared with 91,000 in May.

The Nationwide building society said that house prices rose by one per cent this month compared with June, half the rate of the corresponding month last year. But that still means that there has been a 17.9 per cent rise in the past 12 months. Alex Bannister, Nationwide's chief economist, said: "There is every indication that the housing market is slowing without major problems."

Even so, it remains vulnerable as first-time buyers balk at high asking prices. Nationwide said the number of new buyers had fallen to its lowest level for more than 20 years, down 31 per cent since last year. Vicky Redwood, of Capital Economics, said: "The biggest threat to consumers is a sharp correction in the housing market, which could put a severe dent in households' assets."

People are borrowing to maintain their standard of living. Figures last week indicated that pay rises across the workforce have stalled, except in the public sector, and are not enough to cover the Chancellor's tax increases, such as the recent rise in National Insurance contributions. As a result, the average worker has effectively had a pay cut for the first time in a decade. He or she is filling the gap with debt.

John Butler, an economist at HSBC, said the borrowing figures showed that the Bank of England was wrong to cut interest rates by 0.25 percentage point to a 48-year low of 3.5 per cent this month. "All this is in complete contradiction to the Bank's assertion that the consumer boom is slowing," he said. "The reasons used by the Bank to justify the latest rate cut have almost all been contradicted.

"This provides the biggest danger to any future economic recovery. The cost of trying to boost short-term growth is to risk increasing medium term vulnerability."